Shakedown allegations could have chilling effect on Chicago real estate, years into the city's development boom

Nancy Stone/Chicago Tribune

Ald. Daniel Solis, 25th, is shown at a Chicago City Council meeting in 2014. He reportedly wore a wire for federal investigators looking into the activities of Ald. Edward Burke, drawing dismaying rebukes from a number of his City Council colleagues.

Ald. Daniel Solis, 25th, is shown at a Chicago City Council meeting in 2014. He reportedly wore a wire for federal investigators looking into the activities of Ald. Edward Burke, drawing dismaying rebukes from a number of his City Council colleagues. (Nancy Stone/Chicago Tribune)

Bathhouses might become the preferred meeting place for Chicago real estate developers, zoning lawyers and aldermen to discuss upcoming projects.

And it has nothing to do with recent record cold temperatures.

“The joke among developers is that we’re all going to have to start meeting in saunas, because everybody’s worried about who’s going to be wired up,” said one longtime Chicago commercial developer, who asked to remain anonymous.

It remains to be seen how spot-on that punchline is, as the city braces for the fallout from recent allegations of property owners being shaken down while seeking assistance from public officials.

In the worst-case scenario, the unfolding drama could slow a nearly decadelong boom of construction and headquarters relocations in Chicago, cast suspicions even on law-abiding developers and politicians, and further erode public trust in a city with a reputation for backroom deals.

Left is the impression “that maybe it wasn’t business acumen but something else” if a development succeeds, said Chris Kennedy, a Chicago real estate owner who unsuccessfully sought the Democratic nomination in the last race for Illinois governor.

Kennedy’s family has been a major Chicago landlord since his grandfather, Joseph Kennedy, bought the Merchandise Mart in 1945. The family has since sold the building and the neighboring Apparel Center, and is now building the three-tower Wolf Point development alongside those buildings and the Chicago River.

“Of course there’s the perception (of corruption), because it’s reality,” Kennedy said. “And you’ve seen that play out in the last few days.”

Brian Cassella/Chicago Tribune

Chris Kennedy, stands in office in the Merchandise Mart in 2017. He oversees his family's Wolf Point skyscraper development along the Chicago River.

Chris Kennedy, stands in office in the Merchandise Mart in 2017. He oversees his family's Wolf Point skyscraper development along the Chicago River. (Brian Cassella/Chicago Tribune)

So far, an ongoing federal investigation has yielded a charge of attempted extortion by powerful Southwest Side Ald. Edward Burke; revelations that Ald. Daniel Solis, 25th, has been wearing a wire and cooperating with the FBI for at least two years; and reports that Illinois House Speaker Michael Madigan was secretly recorded by an associate of a developer who once planned to build a Chinatown hotel.

The developments have moved fully into the spotlight an issue that’s been discussed for decades: The potential for conflicts of interest when public officials maintain private careers in fields like property tax appeals.

Recent events also have stoked new conversations about potential abuses of a Chicago tradition often referred to as aldermanic prerogative or aldermanic privilege.

That policy essentially means that each of the city’s 50 aldermen have full discretion over the fate of real estate developments proposed in their wards. The level of real estate sophistication and approaches to development also vary widely from one alderman to the next, adding further layers of complexity, one developer said.

In the case of Burke, an alderman is accused of using power within his ward to try to steer a larger portfolio of real estate business to his law firm, Klafter & Burke. In a federal charge unsealed in early January, Burke is accused of trying to hold up construction permits for renovations to a Burger King restaurant in his ward unless the out-of-state franchise owner provided business to his law practice.

The charge came a few weeks after FBI agents raided Burke’s offices.

Burke, who has maintained his innocence and is running for re-election, has resigned as City Council Finance Committee chairman.

Madigan has long faced criticism for the property tax appeals work his firm, Madigan & Getzendanner, does in representing owners of Chicago skyscrapers and other properties while holding massive political clout.

Solis, who until recently chaired the City Council’s Zoning Committee, and Madigan have not been charged with any wrongdoing.

The developer who joked about meetings in saunas said most developers and public officials he’s encountered are on the up-and-up, but recent events might damage Chicago’s reputation as a place for large institutional investors to spend billions of dollars on real estate.

He likened it to Chicago’s reputation for violence, where a real problem becomes further exaggerated nationally.

“If there’s a perception of the Chicago Way, that you have to need to know somebody and pay to get in, it’s a perception akin to Chicago being called the murder capital,” he said. “That has an effect on willingness to invest in Chicago.”

Another Chicago-based developer, who also asked not to be named, said he’s seen investors think twice about doing business in Chicago because of its reputation for backroom deals and its historically “opaque” property valuation system. But he hopes the ongoing federal investigation, though a black eye to the city, could restore some confidence.

“After this recent news, you’d have to be completely crazy to try anything,” he said. “The party’s over.

“If anything, it’s probably good for the market. Root it out.”

Madigan’s firm filed appeals on nearly $8.6 billion in assessed property values in Cook County from 2011 to 2016, according to a ProPublica-Chicago Tribune analysis published in December 2017. The firm won a combined $1.7 billion in reductions from their clients’ initial property valuations, the analysis found. At the time of the analysis, a Madigan spokesman said the firm’s records showed its appeals resulted in roughly $1 billion in reductions.

Burke’s practice took on a combined $4.7 billion in Cook County appeals during the same time, winning nearly $865 million in combined reductions.

Property tax appeals are commonplace by homeowners and commercial real estate investors — particularly under recently replaced Cook County Assessor Joseph Berrios, whose office was found by the ProPublica-Tribune series to have calculated wildly inconsistent property valuations.

Along with the complexities of the Cook County property tax system, the potential for influence by public officials adds another element to weigh in the overall process.

Laurence Msall, president of the Civic Federation, said the complexities of the Cook County tax system and the politics that go along with it hardly represent a “welcome mat” for businesses looking to locate here.

Concerns arise over the lack of confidence in one of the most complicated property tax systems in the country and there is a “corrosive” impact that occurs when officials at every level of government tell people they need to challenge their property tax bills, Msall said.

“It’s a cost of uncertainty,” Msall said.

When all things are otherwise equal between locations, Msall said, businesses will take their investments to a place where there is the greatest predictability.

Though many property tax firms don’t have politicians on their roster, those firms that do have an elected official on their team add another element to consider.

Asked about the perception that a business had to hire a clout lawyer, Msall said there can be a “confusing interlocking of potential conflicts and synergies” that arise when elected officials handle property tax cases for private interests.

Msall signaled he has hope for a “fresh and new” look at how property taxes are assessed and appealed under newly elected Frederick “Fritz” Kaegi.

“Whether or not you have to play the game, a lot of people believe you have to play the game,” said Cynthia Canary, a veteran good-government consultant. “So there’s a perception, a perception that if you are a major real estate investor, that it’s part of the cost of business to be with the right attorneys, befriend the right elected officials, contribute to campaigns, those kinds of things.”

Canary raised concerns about public bodies like the Cook County Board of Review, which handles tax appeals, because law firms and developers are free to make campaign contributions, a potential area for conflicts of interest.

Kaegi has said he will not accept contributions from property tax firms, because such contributions “creates at least the appearance of a pay-to-play environment.”

“It’s a loop of people thinking that they have to play the Chicago Way, hire certain firms, then certain firms feeling they have to make contributions to the board of appeals,” Canary said. “ And the money just circulates and perpetuates the notion (of) a pay-to-play system.”

State Rep. Robert Martwick, himself a property tax lawyer, recalled a time that a person came to him in hopes of getting an extra political advantage in lowering his taxes. “I had somebody walk into my office and say, ‘Hey, I hear you’re the guy to see to get a special deal,’ ” the Chicago Democrat said. “And I told him straight up, ‘Well, you’re in the wrong place. All I can do is to assure you that you pay no more and no less than you’re required to pay. All I can do is get you accurate. I don’t get anybody deals, and if you’re looking for it, you’re in the wrong place.’ ”

In yet another instance, Martwick heard a businessman say he wouldn’t locate in Chicago because, “I don’t want to get shook down by an alderman. I don’t want to grease palms.’”

He said those kind of observations are rare, but acknowledged a perception that some politically connected firms are so “powerful that you should hire them because they’re powerful.”

“How do you correct that? You could say well, then you prohibit the tax lawyers from serving in government,” Martwick said. “Well, that’s ridiculous. Really. I mean, it really is. Because if you do that, it’s a slippery slope before you ban everybody, and then the only ones you’ll have (in the General Assembly) are people who are independently wealthy because they don’t need outside employment.”

Kennedy, who himself has successfully appealed county property taxes, takes a more skeptical view. Kennedy has described the property tax system as “extortion,” and during his campaign he called for a ban on property tax lawyers making political contributions to local assessors, among other reforms.

Those same issues, and the ongoing federal investigation, hang over the upcoming Chicago mayoral race as candidates scramble to distance themselves from tainted politicians such as Burke.

Kennedy, the son of Robert F. Kennedy who lost in the Democratic primary to now-Gov. J.B. Pritzker, emphasizes that corruption in zoning and property taxes has an impact that extends well beyond downtown skyscrapers.

“If an alderman is saying, ‘You can’t build in my ward without giving me your property tax work,’ this is a racket,” Kennedy said. “It’s extortion. The weapon is the (aldermanic) prerogative. It’s not a gun or a knife, but it’s just as powerful.”